Saturday, August 8, 2009

“FLY the good times,” urges the slogan of Kingfisher airlines. But for India’s commercial-aviation industry, these are far from good times. On July 31st the Federation of Indian Airlines (FIA) threatened a one-day strike to put pressure on the government to save its seven members from going bust. As the government mulls a bail-out for one of them, the moribund state-owned Air India, the FIA is demanding that it also help privately owned airlines by lowering taxes on jet fuel, which are especially high in India. In response, the government warned airlines against inconveniencing passengers and offered talks. The FIA said it would put the strike, scheduled for August 18th, “on hold”.

Until recently India’s private-sector airlines, which carry more than 80% of domestic passengers, were lauded as a symbol of the country’s spectacular economic growth. But growth began to stall in 2007, when rapidly rising fuel prices pushed up fares and the economy slowed. In the first half of this year, airline passenger numbers fell by 8% to 21.1m. Last year India’s aviation industry lost more than $2.5 billion—about 25% of total world airline losses despite accounting for only 2% of global traffic. This year is set to be as bad.

For Kingfisher and its main competitor, Jet Airways, both full-service carriers, times are especially tough. Kingfisher, which reported a net loss of 2.43 billion rupees ($51m) in the quarter to June, owes more than 9.5 billion rupees in unpaid fuel bills and is surviving on bank loans. Jet Airways recorded a net loss of 2.25 billion rupees in the same period.

High fuel costs certainly exacerbate Indian airlines’ woes. Fuel tax is set by most of India’s states at 28%, whereas in much of the rest of the world aviation fuel is untaxed. The airlines want it to be declared an “essential commodity”, making it eligible for tax at 4%. A handful of states, most recently Rajasthan, have cut jet-fuel taxes to 4% in a bid to encourage airlines to establish local services. But others, including two of the most important, Maharashtra (home to Mumbai) and Delhi, are reluctant to follow for big airports: the tax is a valuable source of revenue out of which fuels used by the poor, such as kerosene and diesel, are subsidised.

But burdensome though the taxes are, they are not the only reason why India’s private airlines are suffering. Over-capacity should take much of the blame. “India’s airlines grew too big, too fast,” says Centre for Asia Pacific Aviation. Anxious to chase market share, the airlines priced tickets well below cost. By some estimates, they bought twice as many aeroplanes as the market could support. As competing airlines poached pilots and mechanics, staff costs soared. “It was all about ego rather than business,” says Captain G. R. Gopinath.

Today those egos are badly bruised and, in line with trends elsewhere, it is low-cost airlines that are taking an increasing share of the market. Of India’s three listed airlines, a budget carrier, Spicejet, was the only one to turn a profit in the most recent quarter. The other two are Jet and Kingfisher. Fighting back, Jet launched a no-frills subsidiary, Jet Konnect, in May; last year, Kingfisher took over Air Deccan to create Kingfisher Red. The budget carriers are hoping to ride the economic downturn by offering better value to corporate travellers. But in the longer term they are eyeing a much bigger opportunity: the 98% of Indians who have never flown.